JLF Expert Crafts Balanced State Budget Plan That Lowers Tax Rates

RALEIGH — As Gov. Beverly Perdue and the new Republican-led General Assembly consider options for closing a state budget hole, a new Spotlight report from the John Locke Foundation's top budget expert shows how they can reach their goal while reducing tax rates.

"State legislators and the governor should transform government, not just look for ways to spend less money doing the same things," Coletti said. "We all want better education, health care, and transportation for all North Carolinians, but isn't there a better, less costly way to accomplish these goals than the approach the state has taken for a generation?" he asked. "Those policies have led to a $2.4 billion spending gap for the coming budget year, with $21.2 billion in potential spending and just $18.8 billion of expected revenue."

To correct the imbalance, Coletti offers a detailed list of budget adjustments at http://tinyurl.com/JLF2012NCBudget. Among the highlights of his proposal are tax rate cuts for individuals and corporations.

"Instead of raising taxes, this budget includes rate reductions to set the stage for future tax changes that actually reform the tax code in a way that does not take more money from North Carolina's families and businesses," he said.

The corporate income tax rate would drop from 6.9 percent to 4.9 percent on Jan. 1, 2012. The rate would drop to 4 percent one year later.

Coletti's plan would lower and simplify individual income tax rates in two stages. "On Jan. 1, 2012, the bottom 6 percent individual rate would expand to those earning up to $50,000, the 7 percent rate would fall to 6.75 percent for those earning up to $100,000, and the 7.75 percent rate would drop to 7.5 percent," he explained. "One year later, the state would scale back to two personal income tax rates: 6 percent for income up to $100,000 and 6.5 percent for higher levels of income."

The budget also spells out detailed spending cuts. The top 10 items alone account for nearly $1.1 billion in savings. "This budget proposal starts with the idea that government plays an essential role in some limited areas," he said. "The focus is on directing scarce resources to those areas where government has a role and where it is effective."

Almost every cut Coletti offers is permanent. In contrast, his spending increases are generally one-time changes. "This marks a reversal from standard practice, when legislators have voted for permanent spending increases and temporary cuts."

Overall, Coletti's plan limits state General Fund spending to $18.4 billion, from $18.7 billion of available funds. "Specific changes are based on principles to make government more transparent and accountable, reward results, merge redundant agencies, and end distortions that reward politically favored groups at the expense of the general welfare."

It's time for government leaders to accept the need for cuts, Coletti said. "While private payrolls shrank 9.1 percent between 2007 and 2010 -- those 300,000 jobs are gone -- state and local government payrolls expanded by 4.2 percent," he said. "Stimulus spending mainly allowed government to keep growing. But taxpayers are tapped out. The federal spigot to states is off. Now it is time for governments to downsize."

Coletti compares the current budget picture to the historical record. "Budgeted appropriations in North Carolina grew three times faster than population and inflation from 1978 to 2008," he said. "Using constant 2010 dollars, per capita General Fund appropriations grew from $1,170 to $2,412."

Meanwhile, personal income growth compared to the rest of the country peaked in 1997, Coletti said. By 2009, per capita personal income dipped back to the same level recorded in 1987.

"With this budget proposal, state General Fund spending per capita would be $1,891, basically the same level adjusted for inflation as in 1996 and throughout most of the 1990s," Coletti said. "In other words, this plan returns spending to levels last seen when North Carolina per capita personal income was at its highest compared to the national average."

The governor and legislators should ignore pleas to raise taxes, Coletti said. "North Carolina already has one of the highest tax burdens in the South, higher tax rates than most states, and one of the worst business tax climates in the country," Coletti added. "Advocates for higher taxes recognize this. Instead of admitting it, they argue for 'tax reform' to hide their desire to transfer more money from the private sector to the public sector."

Elected leaders need to target taxpayer dollars toward core government services, Coletti said. "North Carolina, with 9.5 million residents and a $400 billion diversified economy, is too complex for 170 legislators and a few thousand bureaucrats in Raleigh to manage," he said. "It's better to leave more choices in the hands of individuals and businesses who do the work that pays state government's bills."